Tuesday, March 31, 2009

Remember how controversial it was when companies like "YouWalkAway" offered distressed homeowners expertise on how to simply walk away from their homes? Now it appears that lenders are doing the same, leaving semi-foreclosed homeowners and cities to pick up the mess.

City officials and housing advocates (in South Bend, Indiana) and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate.

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure...

Experts suggest the bank walkaways are most visible in states where foreclosures are processed through the courts and therefore tend to be more transparent. Other states, like Indiana and New York, have court-mandated foreclosures, but roughly half of the states allow foreclosures to proceed without court intervention, making it difficult to accurately count the number of bank walkaways in recent months.

The soft housing market and the vandalism that often occurs when a house sits empty are the two main factors influencing the mortgage holders’ decisions to walk away, said Larry Rothenberg, a lawyer for Weltman, Weinberg & Reis, one of the larger creditors’ rights firms in the country.

“Oftentimes when the foreclosure starts out, it’s a viable property,” Mr. Rothenberg said, “but by the time it gets to a sheriff’s sale, it might not have enough value to justify further expense. We’ve always had cases where property was vandalized or lost value, but they were rare compared to these times.”...

The problem seems most acute at the bottom of the market — houses that were inexpensive to begin with — and with investment properties, where investors and banks want speedy closure by writing off bad loans as losses. Banks and investors typically lose 40 percent to 50 percent of their investment on every foreclosure...

In South Bend, boarded-up houses for whom no one has stepped forward are dotting the landscape, adding a fresh layer of blight to communities that were already scarred from the area’s industrial decline. The city is hoping to create a new type of legal mediation process that would bring together the homeowners and the mortgage holders to settle their disputes while allowing the owners to remain in the home — considered crucial to any stabilization effort...

And then, hopefully, some form of responsibility will return from someone.

While recently updating the real estate section for a San Diego economic conference in April, I came across an interesting tidbit: when retail space is located in mixed-use (residential plus retail) developments, it's been reporting higher vacancy rates and lower rents versus traditional retail centers. Why is this? Well, for starters, mixed-use projects are very complex, especially when it comes to parking. Moreover, if the stores depend on new housing units for their traffic, then weakness in housing will undoubtedly have an impact.

I mention this because when I was writing market studies for mixed-use projects, builders would almost always order an objective analysis for the residential portion only, preferring to turn to commercial brokers for an analysis of the retail space's ability to absorb space and achieve specific rental prices. But c'mon, seriously, how silly is that? Because although I'm sure there are plenty of commercial brokers who will provide an objective opinion of a specific project, how do you know if they're only telling the client good news to get the listing? If they're crossing their hearts?

If the residential sector is any example, asking a broker to provide an opinion of value instead of ordering a full-scale appraisal or a traditional market study is simply courting disaster. And these days, in an effort to get more short-sale and foreclosure listings, some agents will, for a variety of reasons, low-ball values. And some people think that's further escalating pricing declines in neighborhoods already filled with distressed properties. From Kenneth Harney's column in the L.A. Times:

Unlike standard property valuations performed by licensed appraisers -- which can run to hundreds of dollars -- BPOs often cost $50 and are performed by real estate agents who may have minimal or no appraisal training and are subject to no regulatory oversight. Realty agents defend BPOs, contending that their extensive knowledge of local market trends equips them to render accurate estimates.

BPOs have become a booming business as foreclosures and short sales have risen sharply. When banks that own foreclosed houses need to put values on them for resale, increasingly they order BPOs that can be delivered quickly at rock-bottom fees.

Short sales -- in which a lender agrees to take less than the principal amount owed by a delinquent owner, provided that the property is sold to a new buyer -- also frequently entail use of BPOs...

One problem is that selling BPOs to value houses violates the law in 23 states, according to appraisal industry leaders. In other states, BPOs may not be prohibited, but critics say they may be far off the mark in accuracy -- typically coming in below appraised values. That's partly because agents who perform the BPOs may set the value extra low to ensure quicker sales.

When BPO-valued houses are listed at fire-sale prices, they exert a downward pull on the values of other houses in the neighborhood because, under lending industry underwriting guidelines, appraisers must consider recent listing prices as well as sale prices...

Gary Crabtree, chief executive of Affiliated Appraisers in Bakersfield, says his company's research "shows very clearly" that BPOs frequently understate actual market values by as much as tens of thousands of dollars.

Why would agents lowball their BPO valuations? Crabtree contends that there are inherent conflicts of interest: "They want to sell the property fast" to make bank asset managers "look like heroes" to their bosses. They may also want additional BPO and property listing assignments from those same bank managers, yielding them commission dollars.

Many of the properties are snapped up by investors at the depressed prices driven by BPO valuations. Those sales then become "comparables" for appraisers, "which simply intensifies the downward spiral" in local property values, Crabtree said.

Are we learning lessons in this country from the past about people who will do anything for a dollar? It sure doesn't look like it.

The latest S&P/Case-Shiller numbers are out, and the news remains bad, with declines of over 40% since the market peaked in several metropolitan areas. But in some markets, the rate of decline is starting to flatten out. First, from an L.A. Times story:

The S&P/Case-Shiller index of 20 U.S. metropolitan areas was down 19% in January from the same month a year ago, the largest decline for that month on record.

Every one of the 20 metropolitan areas in the index showed a price decline in January from a year ago. Since peaking in 2006, the index now shows double-digit declines in all of the cities measured, and the overall 20-city index has fallen 29% from the peak.

The Los Angeles area, which includes Orange County, was down 39% from its peak in 2006. But the worst decline was in Phoenix, at 49%, and four other metro areas showed greater than 40% declines from their respective peaks: Las Vegas, Miami, San Francisco and San Diego.

Los Angeles area prices declined 26% in January from the previous year. The three sharpest January declines, however, were in Phoenix (35%), Las Vegas (33%) and San Francisco (32%)...

However, Jonathan Lansner thinks that the declines in the Los Angeles area (which this index includes with Orange County) may be flattening out. From his blog:

Thursday, March 26, 2009

Given the huge job losses and the retailing brands going out of business, it's little surprise that commercial real estate landlords would be taking a hit. And how that damage seems to be escalating. So what will 2009 look like for them? From a story in the Wall Street Journal:

The delinquency rate on about $700 billion in securitized loans backed by office buildings, hotels, stores and other investment property has more than doubled since September to 1.8% this month, according to data provided to The Wall Street Journal by Deutsche Bank AG. While that's low compared with the home-mortgage delinquency rate, it's just short of the highest rate during the last downturn early this decade...

Some experts say it now looks as if the current commercial real-estate slump will rival or even exceed the one in the early 1990s, when bad commercial-property debt played a big role in dragging the economy into a recession. Then, close to 1,000 U.S. banks and savings institutions failed. Lenders took about $48.5 billion in charges on commercial real-estate debt between 1990 and 1995, representing 7.9% of such debt outstanding.

Since late 2007, a total of 47 banks and savings institutions have failed, of which a dozen or so had unusually high commercial-mortgage exposure. Foresight Analytics in Oakland, Calif., estimates the U.S. banking sector could suffer as much as $250 billion in commercial real-estate losses in this downturn. The research firm projects that more than 700 banks could fail as a result of their exposure to commercial real estate.

Commercial property may not be hit as hard as many fear if the economy pulls out of recession more quickly, driving up rents and occupancy rates. And greater availability of financing -- a key goal of the Obama administration -- could lift property values...

Commercial real-estate debt is potentially more dangerous to the financial system than debt classes such as credit cards and student loans because of its size. The Real Estate Roundtable, a trade group, estimates that commercial real estate in the U.S. is worth $6.5 trillion and financed by about $3.1 trillion in debt. Partly because the commercial real-estate debt market is nearly three times as big now as in the early 1990s, potential losses in dollar terms loom larger...

Although the government efforts to support the housing market seemed to have created a potential bottom in the future for housing prices, could that be a false bottom that leads to a trap door if the overall economy doesn't improve or the government runs out of stimulus money? From a Wall Street Journal story:

In response to gigantic government efforts to support the mortgage market, house prices are showing signs that they mightn't have much further to fall.

But prices have to be built on more than cheap financing. Indeed, government leverage could set the stage for another downdraft if the wider economy doesn't recover fast...

Sharply lower house prices and ultracheap mortgages were bound to spark bargain hunting. Government intervention in credit markets has helped push down rates on standard, fixed-rate, 30-year mortgages to 4.85%. That is the lowest level since Freddie Mac's records began in 1971. After months of decline, house prices jumped 1.7% in January from December, according to the Federal Housing Finance Agency.

This was a small sign the vicious circle in housing can be broken. Policy makers fear the more prices fall, the more likely it is that underwater borrowers choose to default, increasing foreclosures and forcing prices down even further...

However, two countervailing forces could thwart a rally.

First, borrowers mightn't want to take on more mortgage debt while personal balance sheets are still stressed, something not reflected by the affordability index. At the end of last year, personal disposable income covered 75% of household liabilities. In 1991, it was 114%.

Second, rising unemployment could continue to take a heavy toll. It makes the employed more cautious about large purchases, but unemployment does most damage by driving foreclosures higher -- even among borrowers with sounder personal balance sheets...

Even Fannie Mae's 2005 mortgages, most of which should have been conservatively underwritten, are suffering unusually high default rates.

Given this backdrop, the government will be tempted to keep stepping up mortgage subsidies. The risk: Buyers are lured in by artificially cheap financing, only to find the house-price floor subsequently gives way.

One of the best things about America has always been the ability to reinvent oneself by moving to a new place. In my case, that's been pretty limited -- Long Beach to San Diego to Upland to Los Angeles -- but for many people born in small towns in the heartland, moving to a big city or the coasts has been the first step to create a new life. For others, when a new job beckoned, they'd simply sell their home, wait until the kids were out of school and move during the summer. But now, with so many homeowners underwater and health insurance (ridiculously) tied to employment, people stay rooted in places that no longer fit and working at jobs they hate. What does that mean for the U.S. economy? The Economist ponders that very question:

...throughout history, Americans have dealt with economic shocks by picking themselves up and moving on. Their mobility underpins America’s flexible, dynamic labour market. Now it faces two threats.

One is the housing bust. House prices have collapsed by 27% since their peak in 2006. By December last year a fifth of homeowners with mortgages owed more than their homes were worth. Such people are only half as likely to move as those whose homes are above water, estimate Joseph Gyourko and Fernando Ferreira of the Wharton School of business.

Some cannot sell their homes at all. Others could, but don’t want to take a big loss on an investment they thought was safe as houses. Either way, they are stuck. If a good job comes up in another town, they cannot take it. This effect is partly offset by the impact of foreclosures. Last month alone 291,000 homes received a foreclosure notice. The newly evicted are not merely free but obliged to move. This is unfortunate, but although jobs are in short supply nearly everywhere, being mobile at least increases the odds of finding one...

The other threat to mobility is health insurance. A company can buy health insurance for its employees with pre-tax dollars; an individual can buy it only with after-tax dollars. So although soaring premiums are prompting many firms to drop or restrict coverage, most Americans still get their health insurance from their jobs...

Tying health care to a job can tie people to jobs they hate. Gerry Stover, who now runs a doctors’ group in West Virginia, recalls a time when his wife was pregnant and he couldn’t get health insurance at a private firm. He became a prison guard. As a public employee, his family was covered. But the job was neither pleasant nor a good use of his talents...

Some people even get stuck in bad marriages because they need their spouse’s health insurance. As Alain Enthoven of Stanford University puts it, this gives new meaning to the word “wedlock”. The recession seems to have slowed internal migration. Only 11.9% of Americans moved house between 2007 and 2008—the most sluggish pace since records began in the 1940s....

Wednesday, March 25, 2009

The 1990s recession in Southern California was bad -- so bad, in fact, that people were wondering if the state's economy would ever fully rebound. I'm now hearing those voices rise again, although this time the reasons are more numerous. From a column by Steve Perlstein at The Washington Post:

The recession hit here earlier and harder than the rest of the country -- the statewide unemployment rate topped 10 percent last month -- and chances are it will linger here longer.

The severe downturn reflects the region's central role in the Bubble Economy.

As the headquarters for Countrywide Financial, Washington Mutual, New Century Financial and IndyMac, along with several of the nation's largest home builders, Southern California is ground zero for the mortgage crisis and the residential real estate bust.

As the capital of conspicuous consumption, its heavy reliance on auto sales, fashion, electronics and entertainment is now out of sync with the country's new frugality.

And as the gateway through which a majority of the country's imports flowed from Asia to American homes and businesses, its ports, warehouses and distribution channels, which once strained to keep up with the volume, now find themselves with large amounts of unused capacity.

More significantly, the receding economic tide has revealed serious structural problems and challenges in key sectors. The music, entertainment and electronic gaming industries are being turned upside down by the Internet.

The real estate industry is bumping up against the limits of population growth and exurban sprawl. And state and local governments that have long financed themselves by pushing costs off into the future have finally met their day of reckoning...

It is hard to overstate how reliant the Southern California economy has always been on population growth to drive its economic growth -- in oversimplified terms, building houses for the next wave of home builders...

But in recent years, this perpetual growth machine has pretty much run out of steam as residents old and new confronted the realities of two-hour commutes, bad air, a shortage of water and a backlash against illegal immigration.

Moreover, without the steady growth in tax revenue that came with population growth, the Ponzi scheme that passes for public finance in California was suddenly and painfully revealed. Much of the blame lies with public employee unions and a handful of other special-interest groups that have essentially hijacked political control of state and local governments.

Now, despite decades of high taxes and rapid growth, state and local governments find that they not only don't have the revenue to provide even basic services, but are saddled with hundreds of billions of dollars in unfunded pension liabilities and infrastructure needs...

Clearly, no matter how well the economy rebounds, the future cannot be business as usual.

I've always been a fan of eBay -- I've used to sell cars for my family, bought out-of-print sheet music and a studio-quality keyboard, so it's interesting that former CEO Meg Whitman, who has also worked with Bain & Co., Disney and Hasbro, has thrown her hat into the ring to run such an unwieldy state. Many voters have grown apoplectic with Governor Schwarzenegger, who has broken many promises but has basically said, "I can't run again for anything, so what are you gonna do?" So what would she do differently? From a Fortune magazine article:

One reinvention is California, which is more critical to the recovery of the U.S. economy than any other state. Twelve percent of Americans live here. Ten percent of Fortune 500 companies have headquarters here. California's GDP, at $1.8 trillion, makes it the eighth-largest economy in the world. In the past year more people have lost jobs here than in any other state. More homes have gone into foreclosure. More banks have failed. And as Whitman notes, businesses are moving out at an alarming rate, most often citing excessive regulation and intolerable taxes. For top earners, California's taxes are the highest in the U.S. And to what end? California's credit rating is the lowest in the nation.

The other reinvention is the businesswoman who wants to be CEO of the state. Meg Whitman, 52, wasn't born in California - she's from New York's Long Island, and went to Princeton and to Harvard Business School. But she has spent almost half her adult life here. She worked for Disney in strategic planning in the '80s, moved back East, and then returned in 1998 to become CEO of a tiny e-commerce startup. With her big-business knowledge base (from stints at Bain & Co., Procter & Gamble, and Hasbro), she built eBay from 30 employees and $4.7 million in revenue to 15,000 employees and almost $8 billion in revenue.

Her experience growing a large organization and coming to know some of the company's 300 million registered users - 12 million in California alone - fortified her belief that "less government is simply better," she says. She's appalled that California has nearly doubled state spending during the decade through 2008. And she abhors the new budget that Gov. Arnold Schwarzenegger, a fellow Republican and a tarnished model of reinvention himself, muscled through the Democrat-controlled legislature a few weeks ago.

A deal had to get done because California was broke and overdue on $2.8 billion in taxpayer refunds and payments to state contractors. But the new budget that Schwarzenegger signed imposes $12.5 billion in tax increases and $5.4 billion in additional borrowing, along with $15.7 billion in spending cuts...

As for Schwarzenegger, he took office in 2003 after voters recalled Gov. Gray Davis and won reelection in 2006, but he can't run in 2010 because of term limits. His public-approval ratings have tumbled to 38% as he's lost favor mainly with his own Republican Party.

The flailing GOP isn't likely to help Whitman if she makes it past the primary (California's voters are 31% Republican, 44% Democrat). The general election would involve Democratic heavyweights in an era when the party's brand is riding high. The rival nominee could be San Francisco Mayor Gavin Newsom, Los Angeles Mayor Antonio Villaraigosa, or attorney general Jerry Brown, an energetic campaigner who was governor from 1975 to 1983. Brown displays a mix of ridicule and respect when he describes candidate Meg's positioning this way: "'I ran a business. I can buy my campaign. I have zero experience in government. I want to take on the most difficult state government job in America. Therefore, make me governor.' That's her campaign....

After completely missing the boat on the recession (and even doubling down last year on the premise that there would be no such thing), it seems that once presented with evidence to the contrary, the economists at the UCLA Anderson Forecast have climbed to the highest hills to shout "danger ahead!" So is this just PR-based histrionics to regain some credibility or do they have a point? From an L.A. Times story:

Wall Street may be seeing glimmers of a recovery, but UCLA economists are coming out with a new forecast today that offers a grim picture of the year ahead. Nationwide, the unemployment rate will worsen -- peaking late next year at 10.5%.

And in California, which has been battered by tumbling housing, retail and manufacturing sectors, the jobless rate will soar to 11.9% by mid-2010, the latest UCLA Anderson Forecast says...

In releasing their report, however, UCLA economists noted the challenge they faced in trying to forecast the future in the current volatile environment. With dramatic changes in federal policy occurring almost on a weekly basis and few historical parallels with which to compare the current recession, forecasts are being delivered in the most uncertain of times for economists...

Early last year, UCLA said the nation would suffer from tough economic conditions but would ultimately avert a recession. Leamer said that at the time, he did not believe consumer spending could tank the way it did in the latter part of 2008.

This time, the closely watched UCLA report does not hold back...

The financial crisis, they say, has swelled into such a global problem that national policy may be ineffectual. The United States needs its international trading partners to reverse their slowdowns and reignite the exchange of imports and exports.

Nationally, the UCLA forecasters say the economy will begin to grow slowly by the fourth quarter of this year. That's when residential construction should also begin to turn around, but exports will continue to slide downward until the beginning of 2010.

Consumer prices should snap out of a downward trend the second half of this year, but disposable income rates will not match the high levels of 2004 until 2011.

In California, the economy may stop shrinking by the fourth quarter, but it will remain flat and probably will not grow until the beginning of 2010. Normal growth won't return until the middle of 2010, and high unemployment will remain until 2012 or longer, the forecasters said...

I'm happy to report that The Housing Chronicles Blog is now available via subscription on the Amazon Kindle (including a free 14-day trial). The Kindle, a wireless reading device, was designed by Amazon to take advantage of emerging technologies and provide convenience to readers on the go. From the site:

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Tuesday, March 24, 2009

House Republicans floated their own plan to help boost the housing market with the use of tax credits while also cracking down more on mortgage fraud (which is still very much a problem). From a Washington Post story:

Under the proposal, borrowers refinancing their mortgage would be eligible for $5,000 to help cover closing costs or to reduce their principal balance. The plan also revives a $15,000 home buyer tax credit proposal that Republicans pushed last year. This time, the proposal would require the borrower to have at least a 5 percent down payment. Both programs would expire in July 2010...

The Republican proposal also calls for providing additional resources to law enforcement agencies, including the FBI, to investigate and prosecute mortgage fraud. According to a recent study by the Mortgage Asset Research Institute, mortgage fraud jumped by 26 percent last year compared with 2007 even though fewer loans were issued nationally.

Republicans have not attached a price tag to their proposal and it is unclear whether they could gather enough support from Democrats to move the measure ahead.

CityCenter, the enormous, $8.6 billion mixed-use project along The Las Vegas Strip, is now being imperiled because its Dubai-based partner, Dubai World, is suing to limit its exposure. I'll ask the questions I always ask about these disasters-in-the-making: who did the due diligence on the various uses at CityCenter, what assumptions were made, and were any worst-case scenarios factored into the decision making? From a Wall Street Journal story:

A highly touted real-estate partnership between a major Dubai investor and one of the biggest casino operators in the U.S. is in danger of blowing up amid a plunge in Las Vegas gambling and tourism revenues.

Dubai World, a conglomerate owned by the Dubai government, is suing to limit its exposure to its troubled venture with MGM Mirage to develop the $8.6 billion City Center project on the Las Vegas Strip.

In a lawsuit filed Monday in Delaware Chancery Court, Dubai World asked the court to free it from making future payments and fulfilling other obligations under its partnership deal with MGM Mirage. It also blamed MGM Mirage for massive cost overruns on City Center -- a resort and residential complex rising on nearly 67 acres in the heart of Las Vegas. The project is owned jointly by MGM Mirage and a Dubai World subsidiary called Infinity World.

In a potentially greater blow to the project, Dubai World signaled in the lawsuit that it probably won't make a $100 million payment on the City Center project that is due Friday. That would intensify the financial pressure on the project and on MGM Mirage, both of which are struggling to meet looming debt obligations.

Failure to make the payment could jeopardize City Center's ability to pay its debt and perhaps halt construction of the project, possibly pushing it into bankruptcy proceedings...

City Center is the most ambitious of a series of lavish development projects that Las Vegas casinos have taken on in the past few years. Many of those projects were financed when credit was easy to get. But they have ended up saddling their parent companies with massive debt at a time when the gambling and tourism business in Las Vegas is in a steep decline...

If construction continues as planned, the City Center project is scheduled to open in phases starting at the end of this year. It includes nearly 5,000 hotel rooms in three hotels, a shopping mall, casino and two condo towers.

The complex originally was projected to cost $7.48 billion, but that price tag has jumped to $8.6 billion, even though parts of the project have been scaled back.

After being widely derided for being asleep at the switch while folks like Bernard Madoff gradually stole tens of billions of dollars from unwitting clients, the SEC is now targeting subprime lenders, hedge funds and home builders. Imagine what kind of mixer that group would throw! From a BuilderOnline.com story:

The U.S. Securities and Exchange Commission (SEC), which has been roundly chided for not uncovering several high-profile investment fraud schemes, is getting more aggressive.

It appears that builders are being targeted for investigation partly because they (or their subsidiaries) are among the companies that, according to Walter, “provided retail mortgages to consumers.” However, Walter also noted that any investigation of builders might also entail “possible financial fraud, such as improper quarterly earnings management or improper recognition of revenue on model home sales and leasebacks, as well as improper related-party transactions.”

I think those last items are smoke screens. This is about potential mortgage fraud perpetuated by home builders -- a train that left the station long ago.

For those fans of the excellent PBS documentary show "Frontline," tonight they're taking on the subject of the $10 trillion -- and growing -- national debt, made even more serious given the calls by both China and Russia for a new worldwide currency. From the Frontline Web site (hat tip: Patrick.net):

The journey begins as FRONTLINE correspondent Forrest Sawyer takes viewers to a secret location: the Treasury's debt auction room, where the U.S. government sells securities backed by the "full faith and credit of the United States."

On this day, the government is auctioning $67 billion of Treasury securities. The money borrowed will be used to fund services and programs that the government cannot pay for through tax revenues alone.

Observers warn that the United States' reliance on borrowing to fund essential programs is a dangerous gamble. For the first time, investors are beginning to question the ability of federal government to meet its growing financial obligations, and fading confidence can have dire consequences. "You might have a situation where there is one day when the government says we need to sell several billion dollars of bonds, and nobody shows," Economist reporter Greg Ip tells FRONTLINE. "No money to pay the Social Security checks, no money to give to the states for their Medicaid programs. Cut, cut, cut, cut, cut."

Yet more borrowing is exactly what the Obama administration plans to do: hundreds of billions to bail out the banks and other financial institutions; tens of billions more for the auto industry; $275 billion for homeowners and mortgage lenders; and a giant $787 billion stimulus package to jump-start an economy spiraling downward. Just like the Bush administration before it, Obama and his team are going to borrow big.

"That's the paradox of the situation that we're in now," observes Matt Miller, author of The Tyranny of Dead Ideas. "Government has got to run big deficits to stimulate the economy, deficits that would have been unthinkable ... because government's the only entity with the wherewithal to prop up a demand in the economy when businesses and consumers are all pulling back."

Featured speakers will include Christopher Thornberg and Brad Kemp from Beacon Economics, Steve Dorsey, the President of the University of Redlands, and associate professor Johannes Moenius.

On the agenda that day:

Are fears of depression realistic or just hype?

Will the Federal stimulus plan help?

Will California be the first or last to emerge from the darkness?

Rocked by foreclosures, where is the Inland Empire housing market headed in 2009?

All conference attendees receive Beacon's new Inland Empire Economic Forecast Book - an unprecedented overview of the region's current economic conditions and analysis of what the near future holds. Both and residential and commercial real estate sections will be authored by MetroIntelligence Real Estate Advisors.

Click here for a brochure/registration form you can print out in .pdf form, or click here to register online.

Monday, March 23, 2009

Nobel-winning economist Paul Krugman is none too pleased with the latest plan by the Obama Administration to address the financial crisis. From his New York Times column:

Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.

As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now...

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets...

But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost.

Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.

Mindful that everything he does will be analyzed, dissected and criticized by various pundits, reporters, politicians and economists, Treasury Secretary Tim Geithner has written an op-ed piece for The Wall Street Journal explaining his plan for the bad assets held by the nation's banks:

Over the past six weeks we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure.

We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place...

We started a major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending. Last week, we announced additional actions to support lending to small businesses by directly purchasing securities backed by Small Business Administration loans...

However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury...

Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation...

We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession...

But as we fight the current crisis, we must also start the process of ensuring a crisis like this never happens again. As President Obama has said, we can no longer sustain 21st century markets with 20th century regulations. Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers, or on the other hand being forced to pour billions of taxpayer dollars into an institution like AIG to protect the economy against that scale of damage. The lack of an appropriate and modern regulatory regime and resolution authority helped cause this crisis, and it will continue to constrain our capacity to address future crises until we put in place fundamental reforms...

We've certainly been seeing this trend here in California, and now it appears it's also gone national: as prices plummet, home buyers (many investors hoping to hold on and rent homes out for cash flow) rush into the market. So does that potend a bottom or is this market still feeding on itself? From a Wall Street Journal story:

Home resales rose 5.1% to a 4.72 million annual rate from 4.49 million in January, the National Association of Realtors said Monday. About 45% were foreclosure and short sales.

The large number of these distressed property sales is driving prices lower. The median price for an existing home fell 15.5% last month to $165,400. Falling prices depress demand, contributing to the high inventory that is a factor keeping prices down. Inventories of previously owned homes rose 5.2% at the end of February to 3.8 million available for sale, which represented a supply of 9.7 months at the current sales pace...

Sunday, March 22, 2009

They say that starting a new job is one of life's most stressing events -- and if you're Barack Obama and you're taking the helm of the United States as the world teeters on the edge of financial catastrophe? Gallows humor. Lots of it. From CBSNews.com:

By most accounts, this past week was one of the most difficult in the young presidency of Barack Obama. At the heart of it all was the public upheaval over $165 million in bonuses paid to employees of AIG, a company largely responsible for bringing the world's financial system to its knees and now being propped up by U.S. taxpayers. The bonuses touched off a cultural war between Wall Street and Main Street, both of whose support the president needs to help stabilize the economy.

After campaigning in California to drum up support for his $3.6 trillion budget, the president sat down with 60 Minutes in the Oval Office for a conversation about the AIG debacle, the economy, and getting the hang of the world's most difficult job.

Apparently things move very fast in the Obama Administration, with some of his more virulent opponents already calling for his impeachment. But New York Times columnist Frank Rich suggests that the lack of communication on the financial crisis has quickly become Obama's own "Hurricane Katrina" moment. From his column:

A CHARMING visit with Jay Leno won’t fix it. A 90 percent tax on bankers’ bonuses won’t fix it. Firing Timothy Geithner won’t fix it. Unless and until Barack Obama addresses the full depth of Americans’ anger with his full arsenal of policy smarts and political gifts, his presidency and, worse, our economy will be paralyzed. It would be foolish to dismiss as hyperbole the stark warning delivered by Paulette Altmaier of Cupertino, Calif., in a letter to the editor published by The Times last week: “President Obama may not realize it yet, but his Katrina moment has arrived.”...

Six weeks ago I wrote in this space that the country’s surge of populist rage could devour the president’s best-laid plans, including the essential Act II of the bank rescue, if he didn’t get in front of it. The occasion then was the Tom Daschle firestorm. The White House seemed utterly blindsided by the public’s revulsion at the moneyedinsiders’ culture illuminated by Daschle’s post-Senate career. Yet last week’s events suggest that the administration learned nothing from that brush with disaster. Otherwise it never would have used Lawrence Summers, the chief economic adviser, as a messenger just as the A.I.G. rage was reaching a full boil last weekend. Summers is so tone-deaf that he makes Geithner seem like Bobby Kennedy...

With the rising populist anger over growing bail-outs -- especially of international insurer AIG -- Time magazine has a cover story on why the company became "too big to fail." From the article:

The reason AIG has cost taxpayers $170 billion — and the reason the Obama Administration seemed willing, at least at first, to hold its nose and accede to bonuses for the company's managers — is that it's too big to fail. It's an often heard phrase, but what does it really mean?

The idea is that in a global economy so tightly linked that problems in the U.S. real estate market can help bring down Icelandic banks and Asian manufacturers, AIG sits at some of the critical switch points. Its failure, so the fear goes, would set off chains of others, rattling around the globe in short order.

Although some critics say the fear is overblown and the world economy could absorb the blow, no one seems particularly keen on testing that approach....

AIG says it has written more than 81 million life-insurance policies, with a face value of $1.9 trillion. It covers roughly 180,000 small businesses and other corporate entities, which employ approximately 106 million people. That makes AIG America's largest life and health insurer; second largest in property and casualty.

Through its aircraft-leasing subsidiary, AIG owns more than 950 airline jets. Just for good measure, AIG is a huge provider of insurance to U.S. municipalities, pension funds and other public and private bodies through guaranteed investment contracts and other products that protect participants in 401(k) plans...

Keeping the financial system fluid might explain why so many banks got paid in full, which strikes some as a scandal way bigger than the bonus payouts. Many experts wondered why AIG paid 100 cents on the dollar.

Among the biggest beneficiaries of the AIG pass-through, at $12.9 billion, was Goldman Sachs, the investment-banking house that has been the single largest supplier of financial talent to the government. Critics have been quick to note — and not favorably — the almost uncanny influence of former Goldman executives...

Following is an abridged summary from the beginning of the updated report:

With consumer confidence tanking, credit tight for all but those with the highest credit scores and foreclosures continuing to dominate home sales, the Los Angeles-Ventura County experienced a decline of 43% in its rate of annualized new home sales during the fourth quarter of 2008.In fact, the 4,157 sales reported represent yet another new trough over the last 20+ years.

In Los Angeles County alone, new home sales fell to 443 units during the fourth quarter, or down by 51% versus the same quarter of 2007.For all of 2008, new home sales in Los Angeles County fell by 43%, while per-project absorption rates declined to just 1.3 units per month.In Ventura County, quarterly sales fell by an even sharper 76% to 38 homes, while annual sales fell by 46% to 526 units and an average absorption rate of 1.4 sales per month.

As noted last quarter, attached home sales are now performing better, although ‘better’ is relative considering declines of 63% from last year in Ventura County and by 46% in Los Angeles.In both counties and both sectors, builders are looking at average absorption rates of about .5 units per month...

For existing homes, declining prices and more foreclosures helped send sales figures up by nearly 14% from last quarter to 63,447 homes, although that level is still down by about 3% from a year ago.With foreclosures up by 23% between the second and third quarters of 2008, there remains considerable pressure on median prices, which fell by 10% during the quarter to $340,000.

The good news for buyers is that affordability ratios are back up to 36%, or even higher than the average noted over the last 20 years.At the same time, affordability ratios for new homes are about ten percentage points lower.

Given the sharp drop in sales and absorption, builders continue to struggle against tight credit and heavily discounted foreclosures.Even with new home building at a virtual standstill, although the 14,848 units reported as unsold inventory has declined from last quarter – both released to the marketplace and in future phases – the inventory timeline has increased to 43 due to the continued decline in sales rates.

Fortunately, the level of standing inventory includes just 2,111 units and a timeline of 6.1 months.

For the end of 2009, we are projecting the combined Los Angeles-Ventura median detached sales price to approach $400,000, with median value ratios at $130 per square foot.Total new home sales volume will fall to 3,050 units as builders continue to compete against rising foreclosures.

Want to buy the entire 132-page report? Click here to order or contact local Regional Director Greg Doyle at gdoyle@hanleywood.com.

I'll also be at the University of Redlands on May19th for the next Beacon Economics Inland Empire Forecast Conference, for which Hanley Wood is a sponsor. Want to register for that or find out more? Click here.

Following is an abridged summary from the beginning of the updated report:

The good news for San Diego is that the existing home market is continuing to rebound, with sales increasing as homes become more affordable.The bad news is that the market for new homes continues to trend in the opposite direction, with sales declining as affordability dips back into the single digits based on the few units that sold during the final quarter of 2008.The primary reason for this disconnect is the level of foreclosures, which rose by another 23% during the third quarter of 2008 (the most recent data available) to 6,453 units.

The annualized rate of existing home sales rose by nearly 16% to approach 30,000 units during the fourth quarter, just 17% below the long-term average noted since 1988.Of course the reason for the rebound was a 12% decline in the median price to under $300,000 – a level not seen since the middle of 2002.

Although the current recession – deemed the worst since the end of World War II – was officially declared as having started in late 2007, since San Diego’s housing market started slowing earlier than that, it could rebound earlier than other parts of the country; in fact, many economists consider San Diego to be a bellwether for the entire state

Still, due to its past reliance on the housing market and consumer spending, the earliest rebound will not take place until at least late 2009 or early 2010.

Nonetheless, the strengths that have made San Diego County strong -- such as a great climate, steady defense contracts and deep connections to technology and the biosciences -- will continue to provide long-term, albeit delayed, advantages.In the short to medium term, however, the substantial fiscal crisis hitting the state government – which some experts think might result in a declaration of bankruptcy -- will undoubtedly have an impact on all regions throughout California including higher taxes, reduced services, or both...

For year end 2009, we expect the San Diego new home market to record a median detached sales price of $644,500, or a 12% decline from the $732,440 estimated for the end of 2008.The median per square foot value of detached homes is expected to finish the year at $200, down 12% from $227 at the end of 2008. Finally, local builders are projected sell 2,450 new homes in 2009, representing a decline of 84% from the annualized peak of over 15,000 sales in the third quarter of 2004.

Want to buy the entire 103-page report? Click here to order or contact Regional Director Catherine LaFemina at clafemina@hanleywood.com.

I'll also be down in San Diego on April 14th for the next Beacon Economics San Diego Forecast Conference, for which Hanley Wood is a sponsor. Want to register for that or find out more? Click here.

Job losses continued to mount in not just California in February (to 10.5% unemployment), but also rose in Nevada and Oregon to 20-year highs. First, from a Bloomberg News story:

California’s jobless rate surged in February to the highest level since 1983 while unemployment in Oregon and Nevada climbed above 10 percent for the first time in more than two decades.

Unemployment in California rose to 10.5 percent from 10.1 percent in January, its Employment Development Department reported today in Sacramento. Neighboring Oregon’s jobless rate rose a full percentage point to 10.8 percent, and Nevada’s increased to 10.1 percent.

“The West Coast is more heavily dependent on real estate and the decline there has been more pronounced” than in the rest of the U.S., said Sung Won-Sohn, an economics professor at California State University-Channel Islands in Camarillo, California. “We are not seeing any signs of stabilization in the job market.”

Unemployment across the nation may top 9 percent by the end of the year, according to economists surveyed by Bloomberg, and it could go higher. The national jobless rate rose to 8.1 last month, the highest in more than a quarter century, and the economy has lost 4.4 million jobs since the recession began in December 2007...

Meanwhile, on Monday California legislators in the Assembly couldn't muster the votes required to approve a provision that would have extended unemployment benefits by another 20 weeks. For many people, the benefits they now receive as a result of the last federal stimulus package will expire in mid-April, but if they take federal funds this time they'd have to adjust the law so part-time and seasonal employees would also be eligible, which would drive up unemployment taxes for employers.

Instead of doing nothing, why don't they just make the change in the unemployment law temporary like other states have done? Too obvious of a solution? From the L.A. Times:

After an hours-long partisan debate, Republicans in the state Assembly on Monday defeated a bill that would have authorized spending more than $2.5 billion in federal stimulus money to provide 20 weeks of extra unemployment benefits.

The bill would have provided extended benefits this year to an estimated 260,000 jobless Californians, including 74,000 whose unemployment checks are due to run out April 12. They are now eligible for up to 59 weeks of benefits...

Many Republicans said they voted no because they wanted more time to analyze the measure to make sure that it would not cost California taxpayers any money.

Democrats countered that the proposal by Assemblyman Joe Coto (D-San Jose) had to be rushed through the Assembly and the state Senate and to Gov. Arnold Schwarzenegger in time to meet next month's deadline, when about a fourth of the state's chronically unemployed are scheduled to lose benefits...

The California Chamber of Commerce and other business organizations have questioned whether increased eligibility might raise costs for employers by eventually forcing a hike in payroll taxes.

Assembly Democrats said they would bring the unemployment bill back up for another vote soon.

A major issue recently splitting the NAHB, the national lobbying organization for home builders, was whether it made sense to extend the tax loss carryback from 2 to 5 years for companies of all sizes. Smaller builders complained that it would encourage larger competitors to dump their under-water land holdings at fire-sale prices in order to reap the tax benefits, whereas the larger builders contended that the NAHB should also represent their interests.

One important consequence of the housing crisis has been the inability of people to sell their homes in order to move for new opportunities. And that was before the economy started to soften. Now it's becoming an even larger trend, forcing people to stay put until their fortunes revive, and in the cross hairs are the Sunbelt states. From an AP story via BigBuilderOnline.com:

Strapped by the nation's economic crisis, fewer Americans are migrating to Sun Belt hot spots in Nevada, Arizona and Florida, instead staying put for now in traditional big cities.

Census data released Thursday highlight a U.S. population somewhat locked in place by the severe housing downturn and economic recession, even before the impact of rippling job layoffs after last September's financial meltdown...

As a result, rust-belt metro areas such as Buffalo, N.Y., Pittsburgh and Cleveland stanched some population losses, and Boston, Los Angeles and New York saw gains. Well-to-do exurbs around Washington D.C. saw growth slowdowns as people weary of costly commutes moved closer to federal jobs in the nation's capital.

"It's the bursting of a 'migration bubble,'" said William H. Frey, a demographer at the Brookings Institution think tank who analyzed the numbers. "Places that popped up in migration growth in the superheated housing markets earlier in the decade are now just as quickly losing their steam."...

The latest population trends come as state and local governments are deciding where to pour billions of dollars in federal stimulus money to develop schools, roads, bridges and other infrastructure. The nation's decennial head count, used to apportion House seats and redraw congressional districts, also is fast approaching.

Las Vegas, known for its warm climate and wide spaces, had its smallest annual population gain in nearly 20 years...

California had the biggest net loss from people moving to other states. The declines in its interior regions put it at risk of losing a House seat. Los Angeles had major gains, but partly at the expense of Riverside, a sprawling exurb nearby...

Thursday, March 19, 2009

All that's missing from the Federal Reserve's decision to inject $1 trillion in new liquidity into the marketplace is Oprah Winfrey calling out, "You get a billion! And you get a billion...!" So what's the impact been today? From a New York Times story:

The Federal Reserve’s decision to fire up the printing presses to the tune of $1 trillion continued to wash over world financial markets on Thursday, dragging down the value of the dollar and pushing the prices of oil and gold higher...

The Fed’s Open Market Committee also announced it would keep interest rates near zero, and said it expected its target interest rates to remain exceptionally low “for an extended period.”

Unable to cut its target rate any more to try to jump-start the economy, the Fed is now ratcheting up other efforts like buying securities and essentially printing money to try to loosen credit markets and put the financial system back on its feet. But economists said that such efforts could lead to long-term inflation, and could drive down the value of the dollar.

“They clearly bit the bullet,” said James Knightley, senior economist at ING Financial Markets in London. “There’s no guarantee that this will actually work. While they are expanding the money supply, it’s only going to generate economic activity if people actually borrow. You need the demand on the other side to actually get the credit growth.”

And of course there are concerns that this could lead to high inflation once banks and depositors decide to start spending that money. From an op-ed column in the New York Post:

Right now, there is about $800 billion plus currency in circulation sitting in wallets, purses and cash registers around the country. Another $800 billion is sitting in a vault at the Federal Reserve Board, for a total monetary supply of about $1.6 trillion.

In a vault? Yes. When Congress voted the TARP program to bail out banks, the banks actually took only a small part of the money. The rest they used to offset losses on their balance sheets while letting the Fed hold onto the money.

Why didn't the banks want the money? Because they're not about to make loans in this economy. They're more than happy to let the cash sit at the Fed earning them interest. (The Fed decided to start paying interest last November).

So now the Fed will, in essence, be creating another trillion of money supply to sit in the vault alongside the $800 billion already there. The new money will remain idle for the same reason the old money has because banks won't make loans in this environment.

And what of the money that is going out the door to buy Treasury bills? Those selling Treasuries won't run out and spend the money on flat-screen TVs. With higher taxes coming up next year and the economy in the tank, they won't spend it or lend it they'll probably just turn around and buy more T-bills.

Think of a parking garage filled with cars. The cars' owners leave them in the garage, because it's a bad day with rain and snow and conditions aren't suitable for driving. Similarly, banks and consumers leave their money in the vault at the Fed or in their bank accounts or under the mattress.

When conditions improve, though, all those metaphorical cars will suddenly be taken out for a drive. All at once. And a traffic jam of monumental proportion will ensue.

When everybody starts spending the money they're now leaving in vaults and mattresses, way too much money will be chasing way too few goods and services. Double-digit inflation will return to America.

Yesterday's Fed action won't help but it will put more money out there that the Fed will have to mop up once the economy, on its own, revives...

As if the demand for new condominiums units hasn't tanked enough, Fannie Mae is throwing an additional wrench into the system by toughening up lending requirements. From a Wall Street Journal story:

Just as a flood of new condominiums are scheduled to hit the housing market this year, Fannie Mae has added restrictions making it more difficult for developers to sell their units.

The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%. In addition, the company won't back loans for sales in buildings where 15% of current owners are delinquent on association fees or where more than 10% of units are owned by a single-entity.

The new policy became effective March 1, and most lenders have started to implement Fannie's guidelines. Freddie Mac, Fannie's chief rival, hasn't yet followed Fannie's lead.

Fannie says the new rules protect borrowers from buying units in buildings that have a high risk of failure while also preventing the companies -- and taxpayers, given that Fannie and Freddie are operating under government conservatorship -- from throwing good money into troubled developments. Developers can petition Fannie for an exemption from the rule, and so far more than 50 exceptions have been made...

Moreover, Fannie and Freddie are both set to increase fees on condo buyers next month. Buyers without at least a 25% down payment will have to pay closing-cost fees equal to 0.75% of their loan, regardless of the borrower's credit score. The companies say these fees are necessary to protect against higher default rates...

The new rules have left developers in limbo. Some are turning their buildings into rental apartments -- at least in the near term -- on the expectation that they won't be able to sell the units anytime soon. Others are selling units in auctions, often at prices discounted steeply enough to entice cash buyers.

Some developers are seeking creative ways to finance units. Asset-management firm New Oak Capital, based in New York, has begun working with developers to offer seller-financing by recycling existing capital from investors and lenders to fund loans that can be sold to investors or lenders once secondary markets recover...

In extreme cases, developers also are beginning to use Chapter 11 bankruptcy protection to restructure and use their remaining capital to provide seller financing. "It's not that there's not demand for the condo; you just can't get the financing," says Craig Rankin, a bankruptcy lawyer representing the principals of West Millennium Group, which has 12 condo projects in Southern California including the Brockman, an 80-unit condo conversion of a historic building in downtown Los Angeles.

Some are turning to their construction lenders to provide seller financing. Projects with multiple buildings are "re-phasing" their development plans to treat each structure as its own condo. Others are offering rent-to-own purchase plans...

Tuesday, March 17, 2009

Since my name is Patrick and I'm 75% Irish, March 17th is a pretty hard day to forget (although I often leave the drinking on this day to the amateurs).

Frankly, I think everyone should have a pseudo-holiday honoring the patron saint that bears their name. So just how did St. Patrick's day come about? From a wikipedia entry:

Saint Patrick's Day is celebrated worldwide by the those of Irish descent and increasingly by non-Irish people (usually in New Zealand, Australia, and North America). Celebrations are generally themed around all things Irish and, by association, the colour green. Both Christians and non-Christians celebrate the secular version of the holiday by wearing green, eating Irish food and/or green foods, imbibing Irish drink (such as Irish stout, Irish Whiskey or Irish Cream) and attending parades...

The world's first St. Patrick's Day parade was held in Boston in 1761, organized by the Charitable Society. The first recorded parade[5] was New York City's celebration which began on 18 March1762 when Irish soldiers in the English military marched through the city with their music.[6] The New York parade is the largest, typically drawing two million spectators and 150,000 marchers.[7] The predominantly French-speaking Canadian city of Montreal, in the province of Québec has the longest continually running Saint Patrick's day parade in North America, since 1824;[8] The city's flag has the Irish emblem, the shamrock, in one of its corners. Ireland's cities all hold their own parades and festivals, including Dublin, Cork, Belfast, Derry, Galway, Kilkenny, Limerick, and Waterford. Parades also take place in other Irish towns and villages. The St. Patrick's Day parade in Dublin, Ireland is part of a five-day festival; over 500,000 people attended the 2006 parade...

In the past, Saint Patrick's Day was celebrated as a religious holiday. It became a public holiday in 1903, by the Money Bank. (Ireland) Act 1903, an Act of the United Kingdom Parliament introduced by the Irish MP James O'Mara.[17] O'Mara later introduced the law which required that pubs be closed on 17 March, a provision which was repealed only in the 1970s. The first St. Patrick's Day parade held in the Irish Free State was held in Dublin in 1931 and was reviewed by the then Minister of Defence Desmond Fitzgerald. Although secular celebrations now exist, the holiday remains a religious observance in Ireland, for both the Church of Ireland and Roman Catholic Church...